ORDER
K.K. Balu, Member
1. In this application filed under Regulation 44 of the Company Law Board Regulations, 1991 (“the Regulations”) read with Sections 402 and 403 of the Companies Act, 1956 (“the Act”), the applicants who are the respondents 1 & 2 in the company petition seek directions of this Bench to recall and set aside its order dated 22.03.2004 made in the company petition (C.P. No. 36/2003), in exercise of the inherent power on account of the purported fraud played by the third respondent in suppressing certain material facts, thereby misleading this Bench to order M/s Balaji Fabricators Private Limited (“the Company”) for rectification of its register of members by substituting the third respondent in the place of the second respondent, in support of which Mr. C. Kodandaram, learned Counsel made the following submissions:-
• The third respondent had transferred his entire shareholding by way of gift in favour of the second respondent and therefore, payment of consideration for the shares and the requirement as envisaged in the Articles of Association of the Company for the transfer of shares do not arise.
• The third respondent had deliberately made false averments before this Bench that he had transferred the impugned shares in favour of the second respondent, his son, without following the procedure prescribed in the articles and without receipt of any consideration, under a compulsion on account of the latter’s refusal to get married, as borne out by a series of documents which could only be traced out by the applicants after disposal of the company petition.
• The correspondence exchanged between the third respondent and Industrial Development Bank of India (pages 16-19,22,25,28,34,35,37-49 of Volume II of application) would clearly indicate that the important reason for a change in the Managing Directorship of the Company is only to bring the second respondent, a budding entrepreneur into the management in order to meet any challenges arising out of the changed economic scenario of the nation. The correspondence exchanged between the third respondent, the second applicant as the Managing Director and Director of the Company respectively (pages 29, 31 & 36 of Vol.II of application) clearly show that the third respondent was willing to transfer his shares to the second applicant as early as in April 1998 and that the Company had accepted the lodgement of the share certificates for transfer in the name of the applicant. At the meeting of the Board of Directors of the Company held on 10.08.1998, the proposal for transfer of 4,47,000 shares held by the third respondent in favour of the second respondent was kept in abeyance pending approval from IDBI, as borne by the extract of the minutes of the meeting of the Board of Directors at pages 32, 33 of Vol.II of application. This belies the statement of the third respondent that he had not informed about the transfer of his shares in favour of the second applicant to the Board of Directors of the Company and other shareholders, especially when he had chaired the meeting of Board of Directors of the Company. Similarly, the plea that the third respondent had not received any consideration for the impugned shares does not hold good in the light of his communication dated 20/29.08.1998 addressed to IDBI confirming that he had proposed to gift the shares to the second applicant. The third respondent not being a shareholder had instigated the respondents 1 & 2 to file the company petition falsely alleging oppression and mismanagement in the affairs of the Company, wherein the transfer of impugned shares by the third respondent in favour of the second respondent has been specifically admitted (page 4) by the petitioners. The communication dated 02.12.1998 of IDBI (pages 48, 49 of Vol.II of application) permitted the transfer of controlling interest as well as change of management of the Company from the third respondent to the second applicant subject to among other conditions that the second applicant must pledge his shares and furnish personal guarantee. The second applicant, after taking over the management of the Company in December, 1998 pledged his shares in favour of IDBI and discharged the dues of the Company to an extent of over Rs. 80 lakhs due to IDBI, satisfying the charge created over the assets of the Company as borne out by Form No. 17 and Form No. 13 dated 19.08.2000 (pages 79-85 of Vol.II of application) filed by the second applicant. The second applicant had further invested an aggregate sum of Rs. 11.68 lakhs on the plant, machinery, electrical equipment, office equipment etc. and an amount of Rs. 33 lakhs on additional construction of the building, during his tenure as the Managing Director. Thus, the second applicant had carefully handled the affairs of the Company and solved the financial problems faced prior to the year 1998. The credit facilities extended by State Bank of India in favour of the Company were to be secured, inter-alia, by the immovable property and personal guarantee of the respondents 2 & 3 and personal guarantee of all the directors in terms of its sanction letter dated 23.12.1998 (pages 54-58 of Vol.II of application), by which the respondents are well aware of the change of management of the Company and the transfer of shares in favour of the second applicant. However, these facts were deliberately suppressed by the respondents in order to obtain the order dated 22.03.2004. The chronological events reveal that the plea of the third respondent that the impugned transfer is violative of the Articles lacks bonafides and cannot be sustained in the light of the various documents presently produced by the applicants. All the records relating to the shares, particularly those relating to IDBI transactions, were missing from the files of the Company. The records were remaining either in the custody of the previous Accountant or with the third respondent himself. The second applicant can in no way be blamed for non-production of the relevant transfer documents, of which the third respondent cannot plead any ignorance and therefore, in exercise of the inherent power of the CLB under Regulation 44, the order dated 22.03.2004 must be set aside on account of the fraud played by the third respondent, in support of which reliance has been placed on the following decisions: –
Ram Chandra Singh v. Savitri Devi – 2004-2-L. W. 70 – to show it is a fraud in law if a party makes representations which he knows to be false. An act of fraud on court is always viewed seriously and vitiates all solemn acts. Any collusion or conspiracy with a view to deprive the rights of others in relation to a property would render the transaction void ab initio.
Indian Bank v. Satyam Fibres (India) Pvt. Ltd. – (1996) 5 Supreme Court Cases 550 – to show that the courts possess inherent power under Section 151 of Civil Procedure Code, 1908 to recall its judgment or order, if it is obtained by fraud on them or where the courts are misled by a party.
Smt. Pushpa Katoch v. Manu Maharani Hotels Ltd. – (2001) 34 SCL 298 – to show that the CLB would have the powers to review its own order in case the finding and the relief granted are based on fabricated or forged documents.
Smt. Gangabai v. Ratankumar – AIR 1983 Bombay 291 – to show that apart from the provisions of Section 151 of CPC, every court has got inherent powers to correct its own mistakes.
The South India Insurance Co., Ltd. v. Lakshmi – AIR 1967 MDS 464 – to show that the principle of Section 151 of CPC has an intrinsic application to all judicial or quasi-judicial tribunals. Therefore, any tribunal has inherent power to apply the principles of natural justice.
Manohar Lal Chopra v. Bahadur Rao Raja Seth Hiralal – AIR 1962 SC 527 to show that the inherent power has not been conferred upon the court; it is a power inherent in the court by virtue of its duty to do justice between the parties before it.
Dadu Dayal Mahasabha v. Sukhdev Arya – (1990) 1 Supreme Court Cases 189 – to show that the court by virtue of Section 151 of CPC has inherent power to correct its own proceedings when it is satisfied that in passing a particular order it was misled by one of the parties or fraud was practiced upon the court.
Konathala Sriramulu v. Board of Revenue (C.T.) – AIR 1965 Andhra Pradesh 395 – to show that the court in exercise of its inherent jurisdiction derived from Sections 151 of CPC can set aside an order made by it contrary to the terms of a statute and judicial precedents.
United India Insurance Co. Ltd. v. Rajendra Singh – AIR 2000 Supreme Court 1165 – to show that fraud affects the solemnity, regularity and orderliness of the proceedings of the court and also amounts to an abuse of the process of court. Hence, every court or tribunal has the power under Section 151 of CPC to recall its own order, if obtained by practicing fraud on the court or tribunal.
Budhia Swain v. Gopinath Deb – (1999) 4 Supreme Court Cases 396 – to show that Section 151 of CPC envisages the inherent power of the tribunals or courts to recall and set aside an order, if among other things, fraud or collusion has been used to obtain the judgment.
2. Shri Arvind P. Datar, learned Senior Counsel appearing for the third respondent opposed the application on the following grounds:-
• With the deletion of Regulation 27 of the Regulations with effect from 14.05.1992, the CLB is no longer vested with the power of reviewing its own order, as held by the CLB in Dr. Dheep Rajappa v. A. Sivasubramanian – (2002) Vol.110 CC 45. By virtue of Section 10F, the applicants ought to have filed an appeal to the High Court against the order of the CLB within the period specified therein.
• The applicants are barred from producing any document after passing the final order by this Bench. Even otherwise, none of the records now produced does substantiate the compliance of Article 8 of the Articles of Association of the Company at the time of the impugned transfer of shares in favour of the second applicant.
• This respondent neither filed a false counter statement nor deliberately misled this Bench to arrive at the order dated 22.03.2004. This respondent is not supporting either the petitioners or respondents 1 & 2 and never colluded with the petitioners. The plea of collusion in connivance with the third respondent rejected by the CLB cannot be reopened under the guise of the present application. The procedure prescribed in the articles was not followed while transferring the shares in favour of the second applicant.
• When the Bench Officer by a letter dated 03.03.2004 called for the documents in relation to the impugned transfer, the second applicant filed an affidavit confirming that no records were available with the applicants.
• The circumstances relating to the transfer of shares have been set out in the counter statement. The communication dated 27.04.1998 produced by the applicants in regard to the proposed change of management of the Company by transferring the shares in the name of the second applicant does not reveal any fraud on the part of this respondent. Mere certified copy of the minutes of the meeting of the Board of Directors without signature of the Chairman of the meeting in support of the impugned transfer and without production of the original minutes book cannot substantiate the claim of the applicants.
• While the applicants 1 & 2 categorically contended in their common reply (para 7) that on the basis of Article 8, the entire shareholding of the third respondent was transferred to the second applicant, they have now come out with a new theory of gift of the impugned shares by the third respondent in favour of the second applicant. This Bench by an order dated 22.03.2004 held that the procedure as contemplated in Article 8 was not followed at the time of transfer of shares in favour of the second applicant and accordingly set aside the impugned transfer. The documents belatedly produced by the applicants do not in any way establish that the transfer impugned in the company petition was in compliance with the Article 8 or that the gift of shares was completed in favour of the second applicant. The communication dated 20/29.8.1998 of the third respondent (page 42, 47 of Vol.II of application) addressed to IDBI would show that the third respondent had only proposed to gift his shares, but there is no evidence that the third respondent had actually gifted the shares to the second applicant. Moreover, the theory of gift has been taken at this belated stage abusing the process of law. If this theory is accepted, the earlier plea of the applicants that the transfer of shares was in due compliance with Article 8 of the Articles of Association of the Company becomes absolutely false.
• The terms “fraud” means non-disclosure of the relevant and material documents with a view to obtain advantage, as held in S.P. Chengalvaraya Naidu v. Jagannath – (1994) 1 SCC 1. Whereas, there is no such non-disclosure by the third respondent, as borne out by the detailed averments made in the counter statement. The CLB can recall its own order provided the order was wrangled through fraud of such dimensions as would affect the very basis of the claim, as held in United India Insurance Co. Ltd. v. Rajendra Singh (supra), which is not found satisfied in the present case. The power of recalling the order must be exercised rarely.
3. Shri Ramasamy, learned Counsel, appearing for respondents 1 & 2 made the following submissions: –
The applicants never pleaded the theory of gift of shares in their common reply filed in the company petition. The learned Senior Counsel appearing for the applicants though raised the plea of gift of shares at the time of arguing the company petition, the said plea was withdrawn for want of pleadings. The applicants are taking different stand at different point of time, which amounts to abuse of the process of court. Though the applicants were called upon to furnish certain documents in relation to the transfer of shares, they failed to produce any document in support of their earlier claim that the transfer of shares was effected in due compliance with Article 8.
The documents presently produced by the applicants are fabricated and do not in any way show that the impugned transfer was in due compliance with Article 8 or that the shares were gifted to the second applicant.
The extract of the minutes of meeting of the Board of Directors of the Company held on 10.08.1998 containing the resolution in regard to the transfer of shares without signature of the third respondent and the certification at the following page not being related to the transfer of shares do not have any evidentiary value, in the absence of the original minutes book of the Board of Directors maintained by the Company. Moreover, the resolution said to have been passed at the said Board meeting does not approve the transfer of impugned shares in favour of the second applicant.
4. I have considered the arguments of the learned Counsel. The short question that arises for my consideration is whether the CLB in exercise of the inherent power under Regulation 44 is empowered to recall and set aside its own order dated 22.03.2004, in the facts and circumstances of the present case. While the respondents 1 & 2, being the petitioners in the company petition contended that the third respondent had transferred his entire shareholding in favour of the second applicant in gross violation of the Articles of Association of the Company, constituting oppression within the meaning of Section 397, the applicants categorically pleaded that the third respondent had transferred his shares to the second applicant, being the only male member in the family, in order to get him married and further that the Board of Directors in exercise of the powers conferred under Article 8, had approved the impugned transfer of shares in favour of the second applicant, as a desirable person and in the interest of the Company, thereby reiterating the fulfilment of the requirements of Article 8. According to the third respondent, his son (the second applicant) had refused to get married until the entire shares of the third respondent got transferred to the second applicant, compelling the third respondent to transfer his entire shareholding, without following the procedure prescribed in the Articles of Association of the Company and without receipt of any consideration from the second applicant. This Bench, in order to determine the contentious issue whether the impugned transfer was in due compliance with Article 8, as asserted by the applicants, called upon their Counsel by a communication dated 03.03.2004 of the Bench Officer to furnish, duly supported by an affidavit the following information/documents:
1. Date of registration of the transfer of impugned shares in favour of the second respondent.
2. Constitution of the Board of Directors of the Company as on the date of effecting registration of the transfer in favour of the second respondent.
3. Board resolution in original approving the transfer in favour of the second respondent.
4. Shareholding of the second respondent as on the date of transfer of shares by third respondent to second respondent.
5. Instrument(s) of transfer in original executed by second respondent and third respondent in respect of the impugned shares.
The second applicant, in response to the aforesaid communication filed an affidavit sworn on 15.03.2004 reiterating that all the records were misplaced by the previous Accountant, that those are not traceable in spite of the diligent search and further that whereabouts of the Accountant are not traceable in spite of the diligent search. This Bench, after considering the pleadings as well as arguments of the learned Counsel and weighing the materials on record, came to the conclusion that the procedure as contemplated in Article 8 was not followed while transferring the impugned shares in favour of the second applicant and consequently by an order dated 22.03.2004 set aside the impugned transfer of shares in favour of the second applicant. After the final disposal of the company petition on merits, the applicants have now come forward with the present application seeking to set aside the final order on the plea of purported fraud played on the CLB by the respondents, as borne out by a series of documents made available at this stage, according to which, Mr. Kodandaram, learned Counsel contended, inter-alia, that the third respondent had gifted his entire shares in favour of the second applicant; that the second applicant took over the management of the Company upon which invested huge amounts over Rs. 2 crores on the plant and machinery as well as the property of the Company, thereby the Company had grown leaps and bounds and further that the second applicant pledged the shares in favour of IDBI, which subsequently stood redeemed by the second applicant apart from clearing the loans availed from IDBI as well as State Bank of India and securing State Bank of India loan by immovable property and personal guarantee of among others the respondents 2 & 3. Mr. Kodandaram, learned Counsel, referring to the various correspondence extensively pointed out that these developments are within the knowledge of the respondents 2 & 3, but deliberately suppressed them and thus played fraud on the CLB.
Before proceeding to consider the present claim of the applicants on merits, it shall be borne in mind that Regulation 27 of the Regulations having had been omitted with effect from 14.05.1992, the CLB is divested of the power to review its own order. However, in view of the decision of the apex court in United India Insurance Co. Ltd v. Rajendra Singh (supra), the CLB would have the power to review its own order in case the finding and the relief granted are based on fabricated or forged documents or the order is obtained through fraud of such dimensions as would affect the very basis of the claim. Against this background, the plea now raised by the applicants that the third respondent had gifted his shares in favour of the second applicant, as a result of which there is no requirement of compliance with Article 8 must be examined in the light of various relevant documents presently made available by THE applicants. The third respondent in his communication dated 03.08.1998 addressed to the second applicant (pages 29 of Vol.II of application) expressed his willingness to transfer all the shares held in his name to the second applicant. This however, does not speak about the purported gift of shares by the third respondent. The communication dated 07.08.1998 of the third respondent (page 31 of Vol. II of application) is categorical that he transferred his shares to the second applicant and that the Company had accepted the lodging of shares for transfer but the transfer was not given effect for want of approval from IDBI. At the same time, there is on record a communication dated 12.08.1998 addressed by the third respondent to the second applicant (page 36 of Vol.II of application) confirming that he has no objection for transfer of his shares, when the shares were already transferred as per his communication dated 07.08.1998 (supra). The minutes of the meeting of the Board of Directors held on 10.08.1998 (pages 32 & 33 of Vol.II of application) reads thus –
“RESOLVED that pursuant to the agreement dated 23.01.98 entered into between Mr. S. Srinivasa Rao and Mr. S.V.V. Prasad, Mr. S. Srinivasa Rao has transferred 4,47,000 Equity Shares fully paid up having face value of Rs. 10/- held in his individual capacity in favour of Mr. S.V.V. Prasad and the same has been lodged with the Company by Mr. S.V.V. Prasad for transfer on 7.8.98 and the transfer is hereby kept in abeyance pending approvals from Industrial Development Bank of India after which the transfer shall be completed as requested by the transferor and transferee.
FURTHER RESOLVED that the Common Seal of the company be affixed to the documents executed in connection with the said facilities.”
The resolutions consist of two parts. It is clear from the first part of the resolution that the third respondent had transferred his entire shareholding in favour of the second applicant pursuant to an agreement dated 23.01.1998 entered into between the parties, copy of which is not before this Bench. The share certificates were reportedly lodged on 07.08.1998 with the Company, but the transfer was not registered in the name of the second applicant pending approval from IDBI. But the third respondent in his subsequent communication dated 20/28.08.1998 (page 47 of Vol.II of application) addressed to IDBI strangely reported that “So far no shares have been transferred in the name of Shri S.V.V. Prasad. However, on obtaining your approval the shares in the name of Shri S. Srinivasa Rao will be gifted to Shri S.V.V. Prasad.” At this juncture, the averments made in the rejoinder (para 4 at page 4) to the common counter of the third respondent states that “The 3rd respondent had gifted the shares and while so it was his responsibility to lodge the transfer and he had also undertaken to do the same.” This is not supported by any material and runs contrary to the resolution passed at the Board meeting held on 10.08.1998. The Board resolution does not speak about the gift purportedly proposed by the third respondent in his subsequent communication dated 20/28.08.1998. The second part of the resolution dated 10.08.1998 pertaining to affixation of the common seal of the Company to the documents executed in connection with the facilities reportedly approved in the first part of the resolution is wholly unconnected to the resolution relating to the alleged transfer of shares in favour of the second applicant. All these contradictions remain unanswered. Thus, the applicants have propounded two theories, the first one being the transfer of shares in terms of the agreement dated 23.01.1998 and the other one is the gift of shares. While, the transfer of shares by the third respondent was already not found to be in compliance with Article 8, the existing materials would only disclose the intention of the third respondent to gift his shares in favour of the second applicant. Though it was argued that the second applicant had pledged the impugned shares in favour of IDBI, which were subsequently redeemed by him, there is nothing on record sustaining the plea of completed gift in favour of the second applicant, pledge of shares and redemption of such pledged shares by the second applicant. The other documents throwing light on the change of management of the Company by the second applicant, settlement of the Company’s liability registering satisfaction of the charged in respect of the assets of the Company, availment of the credit facilities from State Bank of India, inter-alia, against the mortgage of the immovable properties of respondents 2 & 3 as well as their personal guarantee, do not, however, conclusively establish the plea of gift of shares by the third respondent in favour of the second applicant, but impute knowledge of these developments on the part of respondents 2 & 3, which, is not germane to the contentious issue before this Bench. Moreover, the documents now produced by the applicants do not have any bearing on the order dated 22.03.2004 and therefore, the plea of fraud raised by the applicants does not survive, in which case the decisions cited on behalf of the applicants do not go to their aid, especially when (i) this Bench was not misled by any one of the parties (ii) the documents in question do not affect the very basis of the order dated 22.03.2004 and (iii) there is no error apparent on record even in the light of the documents presently produced by the applicants. For these reasons, there is no need to recall and set aside the order dated 22.03.2004 of this Bench, in exercise of the inherent power under Regulation 44, as claimed by the applicants. This order does not preclude the second applicant from enforcing his rights for realisation of any amount reportedly incurred by him for the benefits of the Company. With these directions, the application stands disposed of.